Buckle up for the coming energy transition

By Gerald Butts, Vice Chairman, Eurasia Group
Gerald Butts
Gerald Butts
Vice Chairman, Eurasia Group

Was summer 2023 too hot for you? Yes, it’s true that Phoenix, Arizona, saw 31 straight days at or exceeding 43°C, southern Europe suffered a series of rolling heat waves that broke one temperature record after another, and parts of the Middle East became too dangerous to perform everyday outdoor tasks. Well, here’s the thing, though it may have been one of the hottest summers of our lives, it’ll almost certainly be one of the coolest for the rest of our lives.

The graphic on the left illustrates how we got to this point. The world has emitted about 75% of the 1.74 trillion tonnes of carbon currently in the atmosphere since 1998. This is the ‘stock’ problem, and it is paramount. The most pernicious aspect of carbon emissions is their persistence in the atmosphere for centuries. We have already baked enough heating into the atmosphere to produce a climate that is radically different than humans have ever experienced.

The magnitude of the hardship and suffering created will force a transition away from fossil fuels. But the process will be messy and highly contested.

A graph of carbon dioxide emissions

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The political challenges

Because CO2 is a ‘well-mixed’ gas with a long lifespan, it doesn’t matter where or by whom it is emitted. Whether caused by a Los Angeles traffic jam in 1999 or a Mongolian coal plant last Tuesday, it’s all the same to the atmosphere, and it’s all still up there. So, while the stock problem may be the most important scientifically, the flow problem is the stuff of politics and geopolitics. As illustrated by the graphic on the right, the rapid rise in global emissions over the past 25 years disaggregates into a radical shift in their geography. China displaced the US as the planet’s dominant emitter in 2006. India will pass the EU in the short term and the US in the medium term. Africa’s contribution to both the stock and flow problem will remain negligible.

Telescoping out, you can see why climate change is a vexing problem for our ‘G-Zero’ world (the term coined by Eurasia Group founder Ian Bremmer to describe inconsistent leadership from increasingly competitive large powers and the weakening of international institutions). Moreover, there are credible stories leaders can tell their citizens about why it is all someone else’s fault. The US blames Chinese and Indian coal plants. China blames western colonial history. Africans and Indians assert their right to develop their economies as westerners did. These arguments may be true (ish), but they are enervating and not all that relevant.

Meanwhile, countries are grappling with the inertial power of the status quo within their own borders. The intractability of the climate change problem is a function of the leverage economic success bestows on incumbents. Whether it’s the domestic coal industry in China or India, the state-owned enterprises that account for the majority of oil and gas production, or the supermajors and utilities more common to western energy systems, the dynamic is similar. Development produces capital, capital converts to equity and generates political power, political power creates its own incentives for self-maintenance. These structural forces combine to establish a stable equilibrium until an exogenous force arises that is powerful enough to overwhelm them.

Climate change is undoubtedly such a force.

The tipping point is approaching

Climate change is fundamentally an energy problem. Electricity, heat, and transportation account for more greenhouse gas emissions than all other sources combined. Technological advancement, astonishing affordability gains via scale effects, and demographic changes are combining across this spectrum to form a cautiously optimistic picture. We are solving the flow problem.

In electricity generation, it will be feasible for wealthy countries to generate almost all their power from carbon-neutral sources within 10 years, with emerging markets likely a decade or so behind. The UK, the birthplace of industrialisation and coal use, is the first large economy to phase out coal. China may be the world’s largest emitter, but it’s also the biggest deployer of green power by orders of magnitude, and the scale of that deployment is responsible for the staggering 90% price declines for solar power and batteries. Global emissions from the power sector may be peaking.

In the transportation sector, electric vehicles (EVs) are close to critical mass, and not just in Norway. China, by far the world’s biggest car market, has become the largest auto exporter on the strength of an EV supply chain it created from nothing in a decade. Germany, Europe’s most prominent car producer, will soon see EV sales overtake those of internal combustion engine vehicles. Even previous laggards like the US and India are starting to experience exponential EV growth, with Washington and New Delhi footing the bill to develop domestic EV and battery manufacturing. It is likely that EVs will dominate the roads before gasoline-guzzling vehicles face bans in many countries in the 2030s.

While the supply chain for the transition is materialising, the demand side will accelerate it and shape its politics. Demographics is destiny, and the generation that will flow into the halls of public and private power over the next 25 years has an outsized incentive to avert the worst climate change scenarios. Some perspective – there were 3.8 billion people on earth when I was born in 1971, there are 3.5 billion in my teenagers’ generation. Given current trends, they may indeed be the largest cohort in human history. They could not have more skin in the game.

Trajectory of the transition

The direction of travel may be set, but the glide path will not be smooth. Incumbents will fight to maintain their status, capital will be misallocated, assets will be stranded, and powerful constituencies will be unexpectedly dislodged. It will, in short, be more difficult than in a stable equilibrium environment to pick winners and losers.

The case of LNG, an early winner, is an instructive example. The downward slope for the fuel could arrive much sooner than many investors and policymakers expect. Natural gas has been a ‘transition fuel’ for about 25 years. The pro-climate argument for gas is simple and strong. It is a cleaner source of electricity generation than coal. Its deployment at scale facilitated the retirement of the once mighty US coal fleet, helping bend the curve of US emissions. The LNG industry was partly built on the promise of replicating that remarkable accomplishment elsewhere, especially in Asia. But now that seems unlikely to happen for a few reasons.

First, the Russian invasion of Ukraine has shaken the confidence of policymakers that gas, however imported, is a reliable, affordable, and geopolitically stable source of baseload energy. Second, the methane emissions associated with its extraction and transport are undermining LNG’s claims of cleanliness. Gas is, after all, a fossil fuel. In an era when emissions will be tracked and increasingly priced with pinpoint accuracy by satellite, there will be nowhere for its methane leakage to hide.

The heavy hand of government intervention is another disruptive factor in the energy transition. There is a growing consensus among policymakers that climate change is the ultimate market failure, and the US Inflation Reduction Act will have many imitators. Their efforts to correct it will produce consequential rough justice within and among states, in the form of both genuinely unintended consequences but also efforts to shoehorn agendas previously unrelated to climate.

Coping mechanisms

We have not yet begun to adapt to climate change in earnest, but we will. We will need to think our way through some truly nasty problems ranging from continental forest fire management and water allocation to sea level rise and large-scale crop relocation. The infrastructure and supply chains needed to deliver them at scale will materialise quicker than people expect.

If there is a ‘Manhattan Project’ candidate among coping mechanisms, it is carbon removal. Whether the technology required to remove a trillion or so tonnes of carbon from the atmosphere becomes viable is perhaps the most consequential question of the next 20 years. Direct air capture is our best bet for dealing with the ‘stock’ problem, but it is far from certain to develop in time to avert the worst.

Improving climate forecasting is another urgent need. The further the present deviates from the past, the harder the future becomes to predict. Probabilities depend on priors. Climate change creates a permanent structural adjustment to the statistics of weather, and this base rate problem increases exponentially as you go local.

This is why it can feel like we’re living in a random event generator. Swathes of northern Canada get incinerated, a hurricane threatens California, heat forces an emergency holiday in Iran, winter ‘disappears’ in South America. Bridging the forecasting gap from possible to probable to almost certain is a life or death proposition in the climate change era. AI-driven models are showing real promise to do just that.

For the past 25 years, we have substantially ignored the most comprehensive alteration to our physical environment in human history. The next 25 will be defined by a forced reckoning with it.

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